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Citi: Australian Dollar will "Resist Further Downside Pressure"

- The Australian Dollar remains tied to global investor sentiment to trade wars.

- But Citi analysts say AUD will now "resist further downside" pressures. 

- Valuation is supportive and better economic data can lift sentiment.

Image © BruceG1001, reproduced under CC licensing

Foreign exchange forecasts from analysts at the world's largest FX dealer, Citibank, suggest the Aussie is likely to resist further downside pressure during the months ahead.

The findings are published here as the Australian Dollar suffers a bout of selling owing to another salvo in the global trade war being fired at China by the United States who are readying another round of tariffs on Chinese goods worth $200BN.

The Australian Dollar is clearly more attuned to global drivers than domestic; the falls come despite a surprsise increase in the number of new home loans approved during May. Housing is a 'hot button' issue in Australia at the moment given falling sales activity in key urban centres like Melbourne and Sydney as well as chatter over a downturn in the market. 

Australian home loans rose by 1.1% back in May, more than reversing a the 0.9% fall from April, when economists had looked for the contraction in mortgage lending to deepen with a fall of -1.9%. Moreover, the Westpac consumer confidence index was shown rising at its fastest pace for a year in May, to its highest level since November 2013.

Nonetheless, the Australian Dollar was marked down against all developed world currencies during the morning session Wednesday.

Australia's Dollar is now down by close to 6% against the US Dollar and 4% relative to the Pound for 2018 but, given it had risen by a similar measure against the Dollar during the first-quarter, it has actually fallen by an even greater degree since the middle of April.

"AUD has been the worst-performing G10 currency versus USD in the first half of 2018. The RBA is unlikely to commence raising rates until Q1 2019, given the underwhelming inflation and consumer spending outlook in Australia," say Citi analysts, in their Citigold Wealth Management mid-year outlook.

But the same analysts say the Aussie might soon find the worst to be over. 

 "Other indicators including business investment, employment and retail sales activity are gathering momentum and together with an improving external picture due to higher commodity prices, AUD is now starting to resist further downside pressure and is poised to gain against USD." 

Commodity prices are key for the Australian Dollar as they form the country's largest earner of foreign currency.

The thinking is that disruptions to global trade posed by the Sino-US spat might in turn lower demand for commodities, thereby impacting a key source of the Australian Dollar's value.

But analysts at Goldman Sachs have told clients that a trade war won't infact interrupt the commodity price rally.

"Concerns about a trade war hurting commodities are overdone, so expect prices to continue higher," Goldman Sachs told clients in a recent note.

Goldman Sachs in fact remains overweight in the asset class and expects commodities to rise 10% over next 12 months, based on the S&P Goldman Sachs Commodities Index.

"The broker believes most commodities subject to tariffs can be rerouted and sold to other markets, averting a supply glut and associated price declines. We agree though we note that higher prices may serve to dampen demand in some areas," says John Mayer at SP Angel in response to the Goldman Sachs argument.

 

Where to for the Aussie?

The Citi team forecast the Australian Dollar will rise back to 0.79 against the US Dollar before year-end and to 0.81 by the end of June 2019. They also predict the Pound-to-Australian Dollar exchange rate will fall nearly 4% to 1.73 before the year is out.

Above: AUD/USD rate shown at daily intervals.

The AUD/USD rate was quoted -0.39% lower at 0.7386 during the morning session Wednesday while the Pound-to-Aussie rate was 0.28% higher at 1.7984. The Aussie was also weaker against all other developed world currencies barring the New Zealand Dollar, which has an equally significant exposure to China and commodity prices.

Above: Pound-to-Australian-Dollar rate shown at daily intervals.

 

Near-Term Pressures Remain Alive Though

Unease across financial markets over President Trump's "trade war", as well as a US economy that is going from strength to strength, have seen the US Dollar emerge resurgent from the depths of a bear market this year.

Wednesday's losses in AUD are entirely the result of a "risk off" shift in global financial markets, brought on by President Donald Trump's decision to push ahead with a 10% tariff on $200 billion of Chinese goods imported into the US annually. US trade representatives say the instruction is in response to China having retaliated against earlier tariffs on up to $50 billion of Chinese goods. 

Comments from the White House suggest the measures are designed to reduce the US trade deficit and protect American companies' intellectual property from alleged theft at the hands of Chinese authorities. China has pledged a response to the latest development although fears are that a tit-for-tat tariff fight between the world's largest economies will quickly descend into an all out "trade war" and that this will dent economic growth in all countries it touches. 

This would be bad for the Australian currency given fortunes of the domestic economy are closely linked with the Chinese economy and the commodity prices. Both of those latter things will be damaged by a trade war. 

"The US ‑ China trade frictions are a downside risk to the global economy despite the actual economic impact being tiny. But markets will react to the uncertainty of a ‘trade war’ slowing global growth. The uncertainty is generally positive for USD and JPY against the CNY, commodity currencies like AUD, NZD and CAD and emerging market Asian currencies such as KRW and SGD," says Elias Hadad, a senior currency strategist at Commonwealth Bank of Australia. 

Only £34 billion worth of US tariffs have actually been implemented to date, with the rest still in the consultation stage. However, when all of the implemented, to-be-implemented and threatened tariffs are added together they account for almost all of the $500 billion of Chinese exports to the US. Despite this, and the obvious adverse consequences for the Aussie Dollar, CBA's Hadad says the levies' actual impact on the Chinese, US and Australian economies will be limited. 

"Our long held view is even if the US applies tariffs on all of its goods imports from China, the economic impact on China, the US and Australia will be very small. The Chinese economy is simply too big for tariffs on its exports to the US to hit Chinese growth much, particularly since China imports components from other economies in its exports to the US. Very little of what Australia sells to China is re‑exported to the US," Hadad writes, in a briefing Wednesday. 

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